Senate Passes Bill Requiring Chinese Firms to Submit to PCAOB Inspection

Chris Gaetano
Published Date:
May 20, 2020
The Senate today approved a bill that would require Chinese companies submit to inspection by the Public Company Accounting Oversight Board (PCAOB) or else be barred from U.S. exchanges, said MarketWatch.

The bill, called the Holding Foreign Companies Accountable Act, would apply to public companies that have retained an accounting firm in a branch or office that, first, is located in a foreign jurisdiction and, second, cannot be inspected by the PCAOB. Generally, if the issuer goes more than three years in a row without its accounting firm being inspected by the PCAOB, then that firm will be unable to sell securities on any U.S. exchange. This prohibition would continue until the issuer retains an accounting firm that the board has inspected. If it then switches back to another firm outside the board's reach, the prohibition would be back on.

The bill would also require that companies submit documentation establishing that they are not owned or controlled by a governmental entity in the foreign jurisdiction (despite the difficulties of proving a negative). If they couldn't t do this, they would be barred from U.S. exchanges.

The measure was co-sponsored by Democratic Sen. Chris Van Hollen of Maryland and Republican Sen. Kevin Cramer of North Dakota and approved without objection.

The PCAOB has long struggled with lack of access to the auditors of Chinese firms listed on U.S. exchanges. Despite years of negotiations, talks to allow inspectors into Chinese firms eventually fell apart. A major sticking point in the talks was that what the PCAOB wanted ran afoul of laws that severely restrict what information can be given to foreign actors. The PCAOB, meanwhile, has expressed concern on numerous occasion about the accuracy of the numbers coming from Chinese audit firms on companies seeking to be listed on U.S. exchanges.

The bill's passage follows earlier comments from the White House mulling over the possibility of requiring that Chinese companies also be required to use U.S. GAAP standards to be listed on U.S. exchanges. While it is unknown by what mechanism this requirement would be imposed, the Securities and Exchange Commission could theoretically impose it through administrative rule-making. Many Chinese companies listed on U.S. exchanges already use GAAP, but those with closer relationships with the Chinese government tend to favor standards issued by the International Financial Reporting Standards Foundation (IFRS), which the SEC currently allows them to use.

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